Sunday, October 20, 2013

Steel companies: My preliminary summary

This post is not so much of a analysis but a summary for myself to crystalline my thoughts. It is kind of getting data overload here. Readers, if you find the trail of thoughts confusing, it most probably I am still confused.

I have did some reading up of various dept on companies that deal with steel, Sin Gheet Huat, Asia Enterprise, HupSteel, HG metals, and Lee metals. In order of preference to invest, I have the following, I have not determined fair entry point yet, but some companies look quite attractive to me already.

It pays very good dividends, 30% to 50% of earnings every year with the exception of 2005, it pays 10% of earning is 2005. If you assume 50% payout and annualized 1H earnings, you get yield of above 10%, if you are conservative and use DPS of 3 cents, you still get a very decent yield of 7.9%

I invest for yield, but, there are few things that bother me. Lee metals' steel fabrication and manufacturing arm has been riding on the construction boom, and is supplying Rebar for the construction companies and earning decent margins of 8-11%. The construction boom of HDB will continue till 2014 at least, but will taper off after 2015. 2014 should be another "golden year" since the profits from the first JV property development project will be locked in 2014.

My concerns are:

1) What happens after 2015. The merchandising and trading arm might recovers with the world economy, but given the super low margin of the segment, about 1 to 2%, the high revenue will not lead to much profits. 1-2% is actually the lowest margin for a steel stockist among all the steel stockists I tracked. They will still have the MRT lines to supply, but I think the peak earnings might be over after 2015.

2) HIgh gearing for its inventories stock up. Although inventory level as a percentage of revenue is not high, and is relatively stable, the gearing level might be a problem when interest rate starts to move up.

3) There is also no guarantee that Lee metals will pay at least 30% of earnings, assume earning revert to the mean, and Lee metals pay out only 30%, yield will fall quite drastically. e.g. 1.2 cents DPU will only mean 3.1% yield, and there is interest risk involved.

Sin Ghee Huat and Asia enterprise

Both companies have solid balance sheet, zero gearing and in net cash position. Both operates mainly in niche market, SGH specialized in 304/304L and 306/306L stainless steel, and its margin are the strongest among the five companies I compared. With the exception of 2009 crisis, SGH net margin is between 7% to 19%. Asia enterprise serve the marine and offshore market. Asia enterprise has margin of between 4% to 9% in recent years

SGH has been generous in his dividend payout, its is almost 100% in average in recent years, but the official payout is 50%. Asia enterprise has an payout of 40% consistently but pay more during 2012.

Concerns:

SGH has really narrow product range when compare to hupsteel and HG metals, it is really focused in what it is doing. That might not be a weakness, but they change have leadership renewal, and the new CEO mentioned about expanding into duplex Stainless Steel, but I have yet to see such products in their website. So this business direction is really the wildcard.

Hupsteel

Hupsteel steel business is really deteriorating at a scary rate, compared to its peers. However, it is sitting on very good industrial land, and is developing industrial spaces within its premises. Check out what Paullow from valuebuddies had say about it.

Had its steel business not been so weak, I might have place it higher in my preference.

HG metals

HG metals has an forgettable 1H, but its revenue and margins have been very volatile. It has great product range, and has a new investor, Oriental Castle Sdh Bhd’s (OCS) investment, but have not been able to steel the company to more stable earnings.

Conclusion:

Lee metals seem to have it good for now, and maybe till 2015, but its balance sheet is not actually strong.

Sin Gheet Huat might be the company that will ride the steel demand upturn well when it comes, but its new business leader have not prove its worth. It is also highly illiquid.

This is one post that I would like some comments, which company would you invest in?

5 comments:

You have done much on the required homework before investing. And if that still doesn’t help then what else can do to help? Others opinion would not be as good. Other than the fundamental analysis works, no one but yourself knows better of your risk appetite profile. Also, have faith in your own investment judgement.